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If the middle managers are asked to come up with the sales targets for next year

and they know that these targets will be used to assess their performance, they are
likely to set asily attainable targets so that their chances of meeting the targets are
higher. However, if targets determined by op management, the target may be
unrealistic as top management may lack the necessary field knowledge to set
realistic targets. This brings us to different approaches of budgeting , namely
bottom-up and top-down.

A bottom up budget is also known as a self-imposed budget or participative

budget. This approach, as illustrated in the left hand column of exhibit 10-1, is a
budget that is prepared with the full cooperation and, participation of managers at
all levels. These budgets tend to have positive impact on employee morale because
the employees views and judgements are valued by the top management.
Employees are likely to be more committed to reaching the targets as these targets
are set buy themselves. With a self imposed-budgets, it is not possible to argue that
the budget is unattainable since it is a self-formed target. A key disadvantage of this
approach is that employees tend to set easily attainable targets in order to make
life easier for themselves. Hence to much budgetary slack or budget padding
can occur with bottom-up budgeting. In general, managers incorporate budgetary
slack by understanding budgeting sales and overstating budgeted expenses. As a
result, the overall targeted net income is understand and can be met more easily.
Budgetary slack or budget padding can be very damaging to the organizations
performance. With a slack budget, a companys performance may not be optimized
as employees tend to underperform with easy targets. Top management must
therefore carefully review the budgeted data prepared for them. Item-by-item
comparisons with industrial figures or past-year data may help to reveal budgetary
slack. Therefore, this bottom-up approach of budgeting is very time consuming and
involves a lot of ecplanations, communications and negotiations between up
management and staff


The initial flow of budget data in a bolltom-up budgeting system is from lower levels
of management to higher levels of management. Each person with responsibility for
cost or revenue will prepare his or her own budgets estimates and submit them to
the next higher level of management. These estimates are reviewed and
consolidated as they move upward in the organization.
It can also cause a lot of undesired behavior effects. One of the major drawbacks of budget lapsing is that it
creates incentives for managers to wastefully spend their entire budget before the end of the year
regardless of the actual needs in order to avoid budgets cuts. For example, managers may organize
expensive overseas staff retreats just before the end of the year, buy a lot of stationery items which can be
expensed off.
Budget lapsing therefore has its purposes and drawbacks. In order to enjoy the benefits of the
system while avoiding wasteful expenditure, a system of reviewing the expenditures near end of the year
can be implemented, and any unusual expenditure is investigated. This may provide the necessary
disincentive for managers to wasteful spending caused by budget lapsing.

Incremental versus zero-based budget

Most organizations plan the years budget by referring to the previous years figures. Adjustments
are then made to the budget to account for the expected changes such as new prices for the next year.
While this method, also known as the incremental budget approach, is practical and fast, any inefficiency in
the previous years figures may be carried forward. For example, if wages and salaries were budgeted
based on the previous years plus a percentage of pay adjustment, the budget would potentially be allowing
an overstaffing situation to continue from the previous year.
Zero-based budgets, in contrast, are prepared based on assumption that the company has just
started operations. Therefore, resources required have to justified from scratch. For example, when
budgeting staff cost for a restaurant, the manager using the zero-based budgeting approach would ignore
the existing staff level and expenses. Instead, he would examine factors such as the opening hours,
number of tables, and expected patron numbers to work out the number of staff required at each position
and level, and the result associate costs. The zero-based methods figures would then be compared with
the previous years figures to check if they are reasonable.
In practice organizations use a mixture of both incremental and zero-based budgets. Most of the
relatively less significant items can be based on the incremental method. This is consistent with the cost
and benefit concept. It is more cost effective to estimate these small items using the less time-consuming
incremental method. The comparatively more time-consuming zero-based method should be used for the
more significant items such as wages and salaries in the service industry. The reason for this is that the
high cost of getting very accurate information for small items is not justifiable by the benefit as small items
impact on budget is relatively small. Budget accuracies for significant items, compared to smaller items, are
therefore much more critical for the overall budgeted profits
Top management attitude in budgeting
the success of a budget program also depends on the degree to which top management accepts
the budget program as a vital part of the companys activities and the way in which top management uses
budgeted data.
If a budgeted program is to be successful, it must have the complete acceptance and support of
the people who occupy key management positions. If lower or middle managers sense that top
management is lukewarm about budgeting , or if they sense that top management simply tolerates
budgeting as a necessary evil, then their own attitudes will reflect a similar lack of enthusiasm. Budgeting is
hard work, and if top management is not enthusiastic about and committed to budget program, then it is
unlikely that anyone else in the organization will be either.
In administering the budget program, it is particularly important that top management not use the
budget to pressure or blame employees. Using budget in such negative ways will breed hostility, tension,
and mistrust rather than cooperation and productivity. Unfortunately, the budget is too often used as
pressure device and excessive emphasis is placed on meeting the budget under all circumstances.
Rather than being used as a weapon, the budget should be used as a positive instrument to assist in
establishing goals, measuring operating results, and isolating areas that need attention.
For an effective budget, top-management attitude toward the preparation and use of the budget is
extremely important. The purpose of the budget is to motivate people and to coordinate efforts. This
purpose would be undermined if the budget was used in arigid and inflexible manner to control people.

Stretch budget and rewards

How challenging should budget targets be? Some experts argue that budget targets should be very
challenging and should require managers to stretch to meet goals. Even the most capable managers may
have to scramble to meet such a stretch budget and they may not always succeed. In practice, most
companies set their budget target at a challenging but attainable level. A challenging but attainable budget
may be very difficult to achieve, but it can almost always be met by competent managers exerting
reasonable effort.
Bonuses based on meeting and exceeding budgets are often a key element of management
compensation. Typically, no bonus is paid unless the budget is met. The bonus often increases when the
budget target is exceeded, but the bonus is usually capped out at some level. For obvious reason,
managers who have such a bonus plan or whose performance is evaluated based on meeting budget
targets usually prefer to be evaluated based on challenging but attainable budgets rather than on stretch
budget. Moreover, challenging but attainable budgets may help build a managers confidence and generate
greater commitment to the budget. And finally, challenging but attainable budgets may result in less
undesirable behavior at the end of budgetary periods by managers who are intent on earning their
bonuses. Examples of such undesirable behaviors are presented in several of the in business boxes in this

The budget committee

A standing budget committee is usually responsible for overall policy relating to the budget program
and for coordinating the preparation of the budget itself. This committee may consist of president; vice
president in charge of various functions such as sales, production, and purchasing; and the controller.
Difficulties and disputes relating to the budget are resolved by the budget committee. In addition, the
budget committee approves the final budget.
Disputes can (and do) erupt over budget matters. Because budget allocate resources, the
budgeting process determines, to a large extent which department get more resources and which get less.
Also, the budget sets the benchmarks used to evaluate managers and their departments. Therefore, it
should not be surprising that managers take the budgeting process very seriously and invest considerable
energy and emotion in ensuring that their interests, and those of their departments, are protected. Because
of this, the budgeting process can easily degenerate into an interoffice brawl in which the ultimate goal of
working together toward common goals is forgotten.
Running a successful budgeting program that avoids interoffice battles requires considerable
interpersonal skills in addition to purely technical skills. But even the best interpersonal skills will fail if, as
discussed earlier, top management uses the budget process to inappropriately pressure employees or to
assign blame.